Producers, refiners post improved second-quarter 2010 earnings

Sept. 27, 2010
Stronger crude oil and product prices in the second quarter of 2010 lifted the combined earnings of a group of US and Canadian oil and gas producing companies and refiners from rather dismal results in second-quarter 2009.

Stronger crude oil and product prices in the second quarter of 2010 lifted the combined earnings of a group of US and Canadian oil and gas producing companies and refiners from rather dismal results in second-quarter 2009.

The second-quarter earnings of a sample of service and supply firms also climbed, up 9% from a year earlier, while their combined net income for the first half of this year declined 15% from first-half 2009.

In this year's second quarter, front-month oil futures prices on the New York Mercantile Exchange jumped 33% from a year earlier to average $78.05/bbl.

Product prices also were stronger than during last year's second quarter, despite a still-weak US labor market and plentiful inventories of products, including motor gasoline, jet fuel, distillate, and residual fuel oil.

The OGJ pump price of self-serve unleaded motor gasoline averaged $2.802/gal in the second quarter of this year, up from $2.29/gal a year earlier. Meanwhile, the No. 2 distillate heating oil wholesale price climbed to average $2.157/gal in this year's second quarter, up from $1.574/gal a year earlier.

Natural gas futures prices were up a bit in the recent quarter, too, as the near-month NYMEX price averaged $4.35/MMbtu, up from $3.81/MMbtu in the second quarter of 2009.

US producers

The oil and gas producers in a sample of US-based companies recorded much-improved earnings and revenues from second-quarter 2009, as many more reported a net loss for last year's quarter.

Anadarko Petroleum Corp. reported a $40 million loss for this year's second quarter compared with a year-earlier net loss of $226 million. In last year's second quarter, the Houston-based company's costs and expenses outweighed revenues, resulting in the loss.

In the recent quarter, however, Anadarko reported a 36% increase in revenue as sales volumes climbed 6% but incurred a $406 million net loss on derivatives and a $49 million income tax expense.

The integrated companies in the group of US firms, those with production and refining operations, reported large increases in earnings from a year ago as a result of higher prices and refining margins. Chevron Corp. posted a 210% increase in net income from the 2009 second quarter to $5.4 billion. ConocoPhillips's earnings, meanwhile, surged 385% to $4.16 billion.

ExxonMobil Corp. reported second-quarter 2010 earnings of $7.56 billion, up from $3.95 billion a year earlier. The company benefited from higher oil and gas prices, improved downstream margins, and strong chemical results, as well as an 8% climb in production volumes vs. last year's second quarter. The company's gas production boost was driven by project ramp-ups in Qatar and greater demand in Europe.

ExxonMobil's merger with US gas producer XTO Energy Inc. was completed during this year's second quarter. Through this transaction ExxonMobil said it has acquired a resource base in excess of 45 tcf of gas equivalent at a cost of under $1/Mcfe (OGJ, Dec. 21, 2009, p. 31).

Refiners

Refining margins improved in the recent quarter compared with those in the second quarter of 2009. Gulf Coast cash margins gained 47% from a year earlier to average $5.61/gal in this year's second quarter, according to Muse, Stancil & Co. (MSC).

West Coast and East Coast margins in the US also were up but not as sharply. West Coast cash margins averaged $10.95/bbl in this year's second quarter, up from $9.47/bbl a year earlier. And on the East Coast, the margin climbed 17% from a year earlier to average $2.26/gal in the recent quarter, according to MSC.

In its Sept. 20 weekly outlook, the Centre for Global Energy Studies noted that although upward movement in margins has provided some relief to refiners, a central problem remains: Crude oil prices are too high in the current economic climate. With the economic outlook still decidedly uncertain, CGES said, it has been difficult for refiners to pass on the cost of crude to consumers, thereby reducing their profit margins.

Independent refiner Tesoro Petroleum Corp. turned around its second-quarter 2009 net loss of $45 million, posting earnings of $67 million in this year's second quarter.

Tesoro said its second-quarter segment operating income was $153 million, excluding special items, compared with $11 million in second-quarter 2009. This increase, the company said, was driven in large part by stronger distillate margins and improved realizations in its marketing channels. These benefits were partially offset by decreased gasoline margins and by reduced throughput, which was primarily a result of one idled refinery and the planned full-plant turnaround at another refinery, Tesoro said.

Valero Energy Corp. also reversed a year-earlier loss to post $583 million in second-quarter 2010 earnings, and Holly Corp. reported a 353% increase in net income to $66.2 million in the recent quarter.

Canadian companies

A sample of oil and gas producers and pipeline companies based in Canada posted a collective 50% increase in earnings in this year's second quarter. The group's revenues were up 24% from a year earlier.

Canadian Natural Resources Ltd. reported $667 million (Can.) in net income for the recent quarter, up from $162 million (Can.) a year earlier. The company said the gain was the result of higher realized crude oil prices, higher sales volumes of crude oil and natural gas liquids, and realized foreign exchange gains.

These factors were partially offset by higher production expense; higher royalty expense; lower realized risk-management gains; higher depletion, depreciation, and amortization expense; and the impact of the stronger Canadian dollar, the Calgary-based company said.

Gas producer Encana Corp. reported a second-quarter loss this year due to a hedging loss and due to a non-operating foreign exchange loss on long-term debt. Encana's gas production in the recent quarter was up 10% from a year earlier.

Encana said its second-quarter operating earnings were down 83% from a year earlier largely due to a quarter-over-quarter decrease in average realized prices to $5.74/Mcfe from $7.05/Mcfe.

Suncor Energy Inc. posted $480 million (Can.) in earnings compared with a second-quarter 2009 loss of $51 million (Can.). The improvement was primarily due to additional upstream production as a result of the company's August 2009 merger with Petro-Canada and higher benchmark prices in this year's second quarter, partially offset by the stronger Canadian dollar relative to the US dollar, the company reported.

Service, supply firms

The sample of oil and gas service and supply companies posted a combined increase in earnings and revenues in this year's second quarter. Three of the firms in this group reported a net loss for the period, while a year earlier, five of these companies incurred a quarterly loss.

The company in the sample with the largest percentage gain in earnings for the most recent quarter is Smith International Inc. (SII), whose net income jumped to $65.1 million from $24.4 million. On Aug. 27, Schlumberger Ltd. announced that it had closed its merger with SII.

Halliburton Co. reported an 82% surge in second-quarter earnings to $483 million this year. Total revenue was up 26%, as the company's completion and production segment reported $2.4 billion in revenue and its drilling and evaluation posted $2 billion in revenue during the recent quarter.

Regarding the blowout at operator BP PLC's deepwater Macondo well, Halliburton Chairman, Pres., and Chief Executive Officer Dave Lesar said, "The tragic incident that occurred in the Gulf of Mexico and the subsequent suspension of deepwater drilling, we believe, will usher in a new regulatory climate and will have a profound impact on how deepwater drilling is performed."

He said, "We are taking appropriate actions to mitigate the impact of the reduced activity in our Gulf of Mexico business, including redeploying our people and equipment to other areas of stable or increasing activity. Contributions from the service sector can play a valuable role in developing new technological innovations and best practices to help customers operate safely and efficiently in these challenging conditions and will generate a corresponding increase in service intensity."

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